The next couple of months will be pivotal for AT&T and a real test of the management skills of company CEO Randall Stephenson, who has now been at the helm of the iconic communications company for 10 years. In that time, Stephenson has guided a remarkable transformation of AT&T into a multidimensional mobile powerhouse with a deep LTE network extending from the U.S. to Mexico. The company has plotted a post-DSL future in fibre-based residential broadband - a space where Verizon has capped its ambitions and Google has pretty much given up. AT&T has also transformed into a leading home entertainment provider through its DirecTV satellite venture and U-verse TV services. It even has a promising over-the-top TV offering to lure cord-cutting millennials.
On the horizon, however, are several major events that either could set AT&T on a differentiated growth trajectory or reshuffle the leader board of American communications providers to its detriment. These big events include the $109 billion merger with Time Warner, the iPhone 8 super cycle, and costly 5G network build out that will be necessary to compete in the 2020s. Within a few years, AT&T surely will be a very different company.
Q2 results show flat or declining revenue in many categories
Earlier this week, AT&T reported Q2 consolidated revenue of $39.8 billion, a decline from $40.5 billion in the year-ago quarter. AT&T attributed the shrinkage to legacy wireline services, which after all these years continue to be a drag on sales, but operating metrics also showed a loss of DirecTV and U-verse TV subscribers in the quarter.
There was some weakness in its prime consumer mobility revenue category but the biggest headline for the company was that it achieved its lowest ever postpaid churn of just 0.79% (the figure is a bit higher if counting consumers who drop cellular connectivity for their tablets from their monthly subscription plans).
One explanation for the high retention rate in the quarter is that consumers have finally stopped fleeing from AT&T in large numbers to T-Mobile and Sprint to lower pricing. Both competitors conducted fierce marketing campaigns in June and July offering cheaper and unlimited voice/text/data plans, including T-Mobile’s 2-for-1 offer on the new flagship Samsung Galaxy S8.
However, another explanation is that the legions of iPhone users across the U.S. are reluctant to jump to a new carrier in the months before Apple’s iPhone 8 launch. Many market analysts are predicting an 'iPhone super cycle' with this new model due to the tens of millions of U.S. mobile users carrying the iPhone 5 or 6 - many 3+ years old and likely with cracked screens and diminished battery life. If the new Apple device is a hit, or at least not a dud, one can expect churn among all the mobile operators as consumers shop for the best deal.
Trimming expenses and boosting margins
During Q2 operating expenses were cut to $32.5 billion versus $34.0 billion a year earlier. As a result, operating income was $7.3 billion versus $6.6 billion a year earlier; and operating income margin was 18.4% versus 16.2%. Second-quarter net income attributable to AT&T totalled $3.9 billion, or $0.63 per diluted share, compared with $3.4 billion, or $0.55 per diluted share, in the year-ago quarter.
Capital expenditures were $5.2 billion in the quarter, down from $5.5 billion in the same period last year. Capex for 2017 now stands at $11.2 billion. Free cash flow - cash from operating activities minus capex - was $3.7 billion for the quarter and $6.9 billion year to date. Free cash flow was $4.8 billion in Q2 2016.
Q2 highlights and operating metrics listed on AT&T investor relations website include:
· Growing U.S. wireless operating income margin of 30.4% with record-high EBITDA margins including best-ever wireless service margin of 50.4%.
· 2.8 million wireless net adds, including 2.3 million U.S., driven by connected devices, prepaid and postpaid, and 476,000 Mexico net adds.
· At the end of Q2, the total number of wireless connections (post and pre-paid) was 51.706 million, down from 54.260 million a year earlier.
· In Mexico, AT&T now has 13.082 million wireless connections, up from 9.95 million a year earlier. There are now more than 88 million LTE POPs, covering 74% of the Mexican population.
· 112,000 IP broadband net adds; 8,000 total broadband net adds.
· More than 5.5 million AT&T Fiber customer locations passed.
· At the end of the Q2, satellite TV subscriptions were 20.856 million, up from 20.454 million a year earlier, but down by 199,000 from the preceding quarter.
· AT&T now has 491,000 DIRECTV NOW subscribers – an OTT service. The company says its DIRECTV NOW service is helping offset traditional TV subscriber decline.
· SKY Brazil now has 5.519 million subscribers, up from 5.348 million a year earlier.
· Total wired voice connections stood at 10.696 million at the end of Q2, down from 11.815 a year earlier.
· International revenues up 10.8% with favourable operating trends.
· Total employee count of 260,480, down from 277,200 a year ago.
